Your borrowing capacity is the maximum amount a lender will let you borrow based on your income, expenses, debts, and deposit.
It determines whether you can afford the property you want, and understanding how it's calculated lets you make decisions that improve your position before you apply. Most buyers in Augustine Heights underestimate how much weight lenders place on regular expenses, and how small changes to spending or debt can shift your borrowing power by tens of thousands of dollars.
How Lenders Calculate What You Can Borrow
Lenders assess your income, subtract your living expenses and existing debts, then apply a buffer to test whether you could still afford the loan if rates increased. Your income includes salary, rental income, and certain government payments, but lenders apply different treatments to each. A permanent full-time salary is assessed at 100%, while overtime, bonuses, and self-employed income may be discounted or averaged over two years. Rental income is typically assessed at 80%, accounting for vacancy and maintenance.
Consider a household in Augustine Heights earning $120,000 combined with no dependents and a car loan of $400 per month. The lender applies a benchmark living expense measure, which is often higher than your actual spending, then adds your car loan and credit card limits. Even if you don't use your credit card, lenders assume you could draw the full limit at any time. If that household has a $15,000 credit card limit, the lender treats it as though $450 per month is being spent, whether that's true or not. After subtracting all expenses and debts, the lender applies a serviceability buffer of around 3% above the current home loan interest rate to ensure you could still afford repayments if rates rose. The figure that remains determines your borrowing capacity.
The Role of Deposit and Loan to Value Ratio
Your deposit size affects both how much you need to borrow and whether you'll pay Lenders Mortgage Insurance. A deposit of at least 20% means you avoid LMI, which can add thousands to your upfront costs. If you're buying in Augustine Heights at the current median for a house, a 20% deposit keeps your loan to value ratio at 80% or below, and most lenders offer better rate discounts at this level.
A smaller deposit doesn't stop you from borrowing, but it does increase costs. LMI premiums rise as your LVR increases, and some lenders tighten their serviceability assessment for loans above 90% LVR. If you're applying with a 5% deposit, you'll need to show stronger income stability and lower ongoing commitments to satisfy the lender's criteria. In our experience, buyers who wait an extra six months to increase their deposit from 5% to 10% often improve their borrowing capacity simply because they've reduced the amount they need to borrow and avoided the higher LMI bracket.
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Why Everyday Spending Appears in Your Assessment
Lenders don't just look at your declared expenses. They use a benchmark figure called the Household Expenditure Measure, which is based on your income, dependents, and postcode. Even if you live frugally, the lender applies this minimum figure to ensure you're not understating your costs. For a couple earning $120,000 in Augustine Heights, the HEM might be around $3,000 per month, regardless of whether you actually spend that amount.
This becomes relevant when your actual spending is lower but your credit card limits or buy-now-pay-later accounts suggest higher available debt. Lenders add the potential repayments from those limits to the HEM figure, which reduces your borrowing capacity. If you're six months out from applying for a home loan, closing unused accounts and reducing credit limits can improve your assessment without changing your income. We regularly see buyers increase their borrowing capacity by $30,000 to $50,000 by clearing a car loan early or cancelling two credit cards they no longer used.
What Happens When You Have Existing Debts
Every ongoing commitment reduces the amount you can borrow. Personal loans, car loans, HECS debt, and credit card limits all count against you. HECS is treated as a percentage of your income rather than a fixed repayment, so it doesn't fall away when you pay it down unless you clear it completely. A $40,000 HECS debt might reduce your borrowing capacity by $60,000 or more, depending on your income level.
As an example, a buyer earning $90,000 with a $25,000 car loan and a $10,000 credit card limit might find their capacity is $80,000 lower than someone with the same income and no debts. If that buyer pays out the car loan and closes the credit card, their capacity increases immediately. The choice isn't always clear, though. Paying off debt improves your borrowing power, but it also reduces your deposit. The right sequence depends on whether you're already at 20% deposit or whether paying down debt would push you below that threshold and into LMI territory.
How Interest Rates and Loan Features Affect the Calculation
Lenders assess your ability to service the loan at a rate higher than what you'll actually pay. If the current variable rate is 6.5%, the lender might test you at 9% or more. This buffer protects both you and the lender if rates rise, but it also means your borrowing capacity is lower than it would be if assessed at the actual rate.
Some borrowers assume a fixed rate loan will be assessed differently, but lenders still apply the same buffer regardless of whether you fix or stay variable. The loan structure you choose doesn't change the assessment, though it does affect your repayments once the loan is active. An offset account linked to a variable loan can reduce the interest you pay over time without changing your borrowing capacity, because lenders calculate capacity based on the full loan amount, not your net position after offset.
Improving Your Position Before You Apply
If your borrowing capacity falls short of what you need, you have a few options. Increasing your income is the most direct path, but it's not always practical in the short term. Reducing your debts and liabilities is faster. Paying out a small personal loan, closing a credit card, or reducing your credit limit can lift your capacity within weeks.
Another option is applying with a co-borrower. Adding a partner or family member with income and low debts increases the combined assessment, though it also means they're equally responsible for the loan. Some buyers in Augustine Heights looking to purchase near the Springfield or Ipswich employment hubs bring in a parent as a co-borrower to access properties they couldn't afford alone. The risk is shared, and the co-borrower's income and debts are both included in the calculation.
If you're close to the threshold, switching from a single owner occupied home loan to an investment loan structure doesn't help your capacity, but restructuring your deposit or adjusting your purchase price might. Borrowing capacity is not fixed. It shifts with every change to your income, spending, and debt position, and understanding the levers lets you make adjustments that matter.
Call one of our team or book an appointment at a time that works for you to talk through your situation and work out what your borrowing capacity looks like before you start looking at properties.
Frequently Asked Questions
What is borrowing capacity and how is it calculated?
Borrowing capacity is the maximum amount a lender will let you borrow based on your income, expenses, existing debts, and deposit. Lenders assess your income, subtract living expenses and debt repayments, then apply a buffer to test whether you could afford the loan if interest rates increased by around 3%.
Does my credit card limit affect my borrowing capacity even if I don't use it?
Yes, lenders assume you could draw the full credit card limit at any time, even if the card has a zero balance. A $15,000 credit card limit might reduce your borrowing capacity by $50,000 or more, depending on your income and other commitments.
Can I improve my borrowing capacity without increasing my income?
Yes, reducing or clearing existing debts such as car loans, personal loans, or credit card limits can increase your borrowing capacity significantly. Closing unused credit accounts and reducing limits are common ways to improve your position before applying for a home loan.
How does my deposit size affect borrowing capacity?
A larger deposit reduces the amount you need to borrow and helps you avoid Lenders Mortgage Insurance if you reach 20% or more. A deposit below 20% doesn't stop you borrowing, but it increases costs and may result in stricter serviceability requirements from some lenders.
What is the Household Expenditure Measure and why does it matter?
The Household Expenditure Measure is a benchmark figure lenders use to estimate your living costs based on your income, dependents, and location. Even if your actual spending is lower, lenders apply this minimum to ensure you're not understating expenses, which affects how much you can borrow.
